Russ Kinnel: Hi, I'm Russ Kinnel. I'm director of manager research for Morningstar. I'm joined today by Larry Pitkowsky of GoodHaven Fund (GOODX), a fund launched about four years ago.

Larry, thanks for joining us.

Larry Pitkowsky: Russ, it's nice to be here.

Kinnel: You have an interesting fund that has a mix of conventional and off-the-beaten-path names, and performance has kind of reflected that. You had a very strong start and then have slumped since then. I wanted to ask what your take is on that. Does that mean your strategy has been out of sync with the market or is it more of a matter of top holdings not being in favor?

Pitkowsky: Russ, when you manage a concentrated portfolio that looks nothing like the index, it's inevitable that you're going to go through some periods where you perform much worse than the index. That's not a flaw; that's just a feature of running a portfolio in the style that we've run--one in which we've had much success over the decades.

Kinnel: And you clearly are someone who invests with conviction. You put a lot in your top names. Why is that?

Pitkowsky: We like to say that it's much easier to try to know a lot about a few things than to know a little bit about a lot of things. That's how we're comfortable investing our own money. That's how we've always done it, and it has worked very well for us over the years.

Kinnel: Some of your names are well known. I look at the financials--I see [Federated Investors (FII)]. Lots of people own that. But then you also have a big position in Walter Investment Management (WAC). Can you tell us a little bit about that one?

Pitkowsky: We tend to go where the opportunities are. When we started the fund, there were many opportunities in some more-recognizable companies that were undervalued and that we thought set us up for some very attractive potential gains. It worked out very well.

Over the last year and a half or so, we found opportunities in some companies that are not really household names. Walter Investment Management, which we've made a much bigger holding recently, is one of them. They are a special-mortgage servicer. It is a niche part of the mortgage-servicing industry that is dominated by a handful of companies. We think there is attractive growth ahead. We think the company is well run, and we think the stock is very cheap.

Pitkowsky: I think that the industry went through a year and a half or so of added regulatory scrutiny, added costs, and a lot of noise. We think all of those things are now headed in the right direction. We think Walter, in the first quarter of this year, really cleared up a lot of questions--about the future direction of cost and about some minor regulatory things they needed to clear up. They are now also raising money for an outside capital vehicle called WCO, which we think will enable them to grow in a much more profitable way going forward.

Kinnel: One of the reasons the fund has underperformed is that you've got some natural-resources names--which, of course, are about the least-popular names out there right now. You've got WPX Energy (WPX) and Barrick Gold (ABX). What's the thinking on names like those?

Pitkowsky: We're always attracted to areas that are unpopular and out of favor. In the beginning of the fund's life, major holdings were Hewlett-Packard (HPQ) when it was out of favor and Microsoft when it was in the mid-$20s and everybody called it dead money and wondered how they were ever going to compete against Google (GOOGL) or Apple (AAPL).

Over the last year or so, we've made some very big investments in energy and mining because those are areas we think are undervalued--where we think companies are hated and despised. We think we've found a handful of companies where there's a lot of upside, and we think the downside we well understand.

Kinnel: In cases like that, is it about predicting a commodity price or is it more about management?

Pitkowsky: It's not at all about trying to predict the commodity price. We don't think we have any special ability to predict the price of oil and gas or gold. But if we find a company that we think can withstand lower prices, that's run by a management team that has a realistic game plan, and where we think we're buying the shares with a margin of safety--even assuming the price of the commodity doesn't recover--we're interested. We've done this successfully over the decades.

Kinnel: I want to go back to the topic of volatility in returns. What do you think that means if I'm an investor in a fund like this? What should my time horizon be? How do I look at those year-to-year returns as well as the long term?

Pitkowsky: We think you should really have at least a five-year horizon. There have been all kinds of interesting studies and analyses that show that managers with great long-term records often underperform 30% to 40% of the time but can come through that with great records over time; however, too many people get shaken out during the difficult periods.

In our mind, this is the exact time when somebody should be looking for a portfolio that looks nothing like the index--that's more focused on areas that have been out of favor--versus somebody that's really a quasi-index portfolio.